The dollar remains under pressure despite denials that the Trump administration wants a weaker dollar. U.S. officials denied reports that they discussed FX policy as part of ongoing trade talks (see below), but the damage has been done. DXY is trading lower near 100.736 and has given up virtually all its post-China euphoria gains. The yen is outperforming, with USD/JPY trading lower near 145.95 and likely to test the floor of what we saw as a new 145-150 trading range. Elsewhere, the euro is trading higher near $1.1205 and sterling is trading higher near $1.3295 after solid Q1 GDP data (see below). We continue to view any dollar relief rallies with skepticism, which this week’s price action would seem to confirm. Easing trade tensions have removed a significant headwind on the dollar over the short-term, but the medium- and long-term impact on the U.S. economy will be felt in the coming weeks and months. Today’s PPI and retail sales data may start to show cracks in the outlook (see below).
AMERICAS
U.S. officials denied that they are seeking changes in currency policy as part of ongoing trade talks. An unnamed official said Treasury Secretary Bessent is the only member of the Trump administration that can address currency policy, and added that he is not deputizing any other officials to engage in any discussions with U.S. trading partners. That person stressed that currency policies will only be negotiated with Bessent present. They added that while the Trump administration wants trading partners to refrain from unfair currency manipulation, there are no plans to discuss currency policy in any trade deals.
The denial led to some profit-taking but we think the weak dollar policy will remain a nagging suspicion. As Otto von Bismarck once said, “Never believe anything in politics until it has been officially denied.” Indeed, currency appreciation in exchange for trade accords is one of our central global macro themes. Specifically, a grand bargain between the US and China - one that devalues the dollar against the Chinese renminbi (CNY) - is very much a possibility. See here for details.
Fed Chair Powell speaks for the first time since the May 7 FOMC decision. The topic is the Fed’s five-year review of its monetary policy framework. There is no Q&A, so we don’t expect new policy insights from Powell. That said, nothing has changed since the post-decision conference, when Powell stressed that “We’re in the right place to wait and see how things evolve. We don’t feel like we need to be in a hurry. We feel like it’s appropriate to be patient.” Most importantly, Powell said “It’s not a situation where we can be preemptive, because we actually don’t know what the right response to the data will be until we see more data.” Governor Barr also speaks today.
Other Fed officials remain just as cautious. Vice Chair Jefferson said “With the increased risks to both sides of our mandate, I believe that the current stance of monetary policy is well positioned to respond in a timely way to potential economic developments.” Daly said “When you step back from the uncertainty and you look at where we are, we’ve got solid growth, solid labor market and declining inflation.” She added that “The word of the day is patience. Patience to see, not guess.” Regarding the recent data, Goolsbee said “They only come out with a lag of a month or so. So we're still kind of holding our breath.” He added that “When there are moments of a lot of dust in the air, like what we saw a bit in April, you can go into some of this paralysis, but it still takes some time for that to show up in the numbers,”
Market expectations on Fed easing have adjusted significantly. The odds of a June cut have fallen below 10%, rising to around 40% in July. A cut in September is no longer fully priced in, with odds falling to around 90%. Looking ahead, the swaps market is pricing in around 75 bp of total easing over the next 12 month, down from 125 priced in last week.
April PPI data will be the highlight. Headline is expected to fall two ticks to 2.5% y/y, while core is expected to fall two ticks to 3.1% y/y. Keep an eye on PPI ex-trade, transportation, and warehousing, as it feeds into the PCE calculations. In March, this measure came in at 4.0% y/y and was the lowest since November 2023. While the CPI data did not show much impact yet from the tariffs, the PPI data is more likely to reflect the tariffs since it takes some time to pass on the higher costs to consumers.
April retail sales data will also be important. Headline is expected flat m/m vs. 1.5% in March, while ex-autos is expected at 0.3% m/m vs. 0.6% in March. The so-called control group used for GDP calculations is expected at 0.3% m/m vs. 0.4% in March. The data have been distorted by tariff front-running but at some point soon, consumption will weaken significantly.
The Q2 growth outlook is solid. The Atlanta Fed GDPNow model has Q2 growth at 2.3% SAAR now and is nearly back at the initial estimate of 2.4%. It will be updated today after the data. Elsewhere, the New York Fed Nowcast model has Q2 at 2.4% SAAR and will be updated tomorrow, while its initial Q3 estimate will come at the end of May.
Banco de Mexico is expected to cut rates 50 bp to 8.5%. At the last meeting March 27, Banco de Mexico cut rates 50 bp to 9.0% and indicated that more cuts of “similar magnitude” were possible. Minutes of that meeting showed that “Most members noted that risks associated with trade policy changes in the United States would have both upward and downward repercussions for inflation.” However, one board member noted that “the effects of the uncertainty resulting from said policy so far have already been reflected in an additional weakening of the economy.” Looking ahead, the swaps market is pricing in 150 bp of total easing over the next 12 months that would see the policy rate bottom near 7.5%.
EUROPE/MIDDLE EAST/AFRICA
President Trump claimed that the U.S. and Iran are close to a nuclear deal. Specifically, he said “I think we’re getting close to maybe doing a deal. You probably read the story that Iran has sort of agreed to the terms.” This may turn out to be another over-optimistic claim but the softer tone has taken a toll on oil prices, as a deal would presumably allow for more Iranian production and exports. Stay tuned.
U.K. reported solid Q1 growth. The economy grew a tick faster than expected at 0.7% q/q vs. 0.1% in Q4, driven by gross fixed capital formation, net exports, and private consumption. Inventory destocking and government consumption were the main drags to growth in Q1. However, the data do not yet the capture the drag on U.K. growth from the impact of higher U.S. tariffs announced in April. Going forward, the BOE projects underlying GDP to remain broadly flat in Q2, while headline GDP is expected to grow by just 0.1% q/q. Odds of a 25 bp cut in June have fallen below 15%, while the swaps market is pricing in 50 bp of total easing over the next 12 months vs. 75 bp at the start of this week. MPC member Dhingra speaks later today.
Norway reported strong Q1 GDP data. Mainland GDP grew 1.0% q/q vs. 0.6% expected and -0.4% in Q4, the fastest pace in almost three years. Growth was broadly based, but was particularly strong in power production and retail trade. Norges Bank rate cut bets by year-end were reduced by half to 25 bp after the GDP data. The upward adjustment to Norway rate expectations supports a firmer NOK versus USD and EUR.
ASIA
Australia reported strong April jobs data. 89.0k jobs were added vs. 22.5k expected and a revised 36.4k (was 32.2k) in March. The mix was strong, as 59.5k full-time jobs were added along with 29.5k part-time jobs. The unemployment rate remained steady as expected at 4.1%, as the participation rate rose to 67.1% vs. 66.8% in March. The market continues to fully price in a 25 bp cut to 3.85% at next week’s policy meeting as inflation pressures have eased. However, the solid jobs market means the RBA will keep rates restrictive or above neutral for longer. Based on the average of the RBA’s seven models, the nominal neutral rate is between 2.75-3.00%. The swaps market is pricing in 75 bp of total easing over the next 12 months (down from 100 bp before the jobs data), which would see the policy rate to bottom near 3.25%.
President Trump claimed that India has offered to remove all tariffs on U.S. goods. Specifically, Trump said that India has “offered us a deal where basically they are willing to literally charge us no tariff.” We are very skeptical. India is one of the most protected economies in the world, with myriad tariffs and non-tariff barriers on imported goods. It is highly doubtful that India would put this sort of offer on the table, especially at such early stages. India’s Trade Minister is scheduled to meet U.S. officials May 17-20 for further talks.
